Let’s Be Clear: The Importance of Language in Mandatory Arbitration Clauses

Arbitration, a widely known and used alternative dispute resolution (ADR) process, is often favored by parties who are seeking to avoid traditional litigation in New Jersey’s court system.   Arbitration involves the submission of disputes to one or more neutral decision makers, sometimes through an organization like the American Arbitration Association (AAA), for a final and binding decision that is rendered after a hearing takes place in a private setting, as opposed to in a courtroom.  Those who seek to arbitrate claims often assert that arbitration is more cost effective and efficient than its alternative—a civil trial.  Conversely, those who are critical of arbitration point out that the often limited discovery and motion practice, and lack of opportunity for the alleged aggrieved party to have his or her case heard by a jury, is detrimental to parties with fewer resources and lesser bargaining power. 

The fact remains that arbitration is extremely prevalent in a variety of contexts, from consumer contracts, to shareholder agreements, to employer contracts with their employees.   In recent years, when parties have challenged the validity of mandatory arbitration clauses, the Court has held those arbitration clauses to a high standard.  Whether you are the drafter of a contract who is seeking to enforce a mandatory arbitration clause, or a party to a contract who is wondering whether you will be required to arbitrate any potential claim, it is crucial that you take note of the Court’s approach to enforceability of mandatory arbitration clauses.

The Court has made it clear that if mandatory arbitration clauses do not clearly advise parties to a contract that in agreeing to arbitrate all matters, they are waiving their right to a trial by jury, those clauses will be held unenforceable.  A seminal case, Atalese v. U.S. Legal Services Group, 219 N.J. 430 (2014) was decided in 2014 by the New Jersey Supreme Court.  Atalese involved a challenge to the enforceability of an arbitration clause in a service contract.  Plaintiff, a consumer who hired the defendant to provide her with debt-adjustment services, filed a Complaint alleging that the defendant violated the Consumer Fraud Act (CFA) and the Truth-in-Consumer Contract, Warranty, and Notice Act (TCCWNA).  Id. at 436.  When the defendant moved to compel arbitration, the plaintiff argued that the defendant failed to provide notice to her that, by signing the agreement, she was surrendering her right to seek relief in a judicial forum.  Id. at 435-36.  The Supreme Court agreed.  Notably, the Court observed that the arbitration clause at issue failed to explain that the plaintiff was waiving her right to seek relief in court for an alleged breach of her statutory rights.   Id. at 446.   The Court further noted that the arbitration clause failed to explain what arbitration was, failed to indicate how arbitration is different from a proceeding in a court of law, and failed to be written in plain language such that it  was “…clear and understandable to an average consumer that she is waiving statutory rights.”  Id

In holding the arbitration clause unenforceable in Atalese, the Court advised that arbitration clauses must explain that the plaintiff is giving up his or her right to bring claims in court or have a jury resolve the dispute.  Id. at 447.  The defendant’s failure to include “clear and ambiguous language that the plaintiff [was] waiving her right to sue or go to court secure relief” rendered the arbitration clause invalid.  Id. at 446.  Ultimately, the court did not find contractual language demonstrating that there was mutual assent to have the parties’ claims decided by an arbitrator as opposed to in court.  Id

While Atalese involved a consumer contract, the reasoning in that case has been broadly applied in other contexts.  For example, in Dispenziere v. Kushner Cos., 438 N.J. Super. 11, 15 (App. Div. 2014), the Appellate Division, in citing Atalese, held that a mandatory arbitration clause in a real estate contract was unenforceable for failure to expressly include notice to the parties that they were waiving their right to sue in court.   In finding that the mandatory arbitration clause was “…devoid of any language that would inform unit buyers such as plaintiffs that they were waiving their right to seek relief in a court of law,” the Appellate Division opined that this lack of notice was “fatal to defendants’ efforts to compel plaintiffs to arbitrate their claims.”  Id. at 12.  The Appellate Division rejected the defendants’ contention that the presence of counsel during the at-issue real estate transaction cured the inadequacy of the arbitration clause.  Id. at 15. 

The New Jersey Supreme Court’s reasoning in Atalese, and the Appellate Division’s subsequent holding in Dispenziere, has been instructive in subsequent cases statewide involving everything from basic consumer contracts to employment agreements between large companies and their employees.  Whether you are a small business owner who is seeking to ensure that any disputes with your customers and employees are arbitrated, or an employee who wishes to ensure that you have a right to a jury trial in cases involving discrimination or harassment in the workplace, it is crucial that you are aware of any possible mandatory arbitration clause and its enforceability (or lack thereof).

For questions, concerns, or more information, please do not hesitate to contact us at (732) 545-4717.